BIG­FI/Fin­ance Sem­in­ar with Amy Huber, Whar­ton Uni­ver­sity of Pennsylvania

Please join us for a BIGFI/Finance Seminar with Amy Huber, Wharton University of Pennsylvania.

Amy Huber will present:

We quantify how uninformed demand affects exchange rates in an interconnected FX market. Using 11 years of daily customer-bank FX flows and exchange-rate returns across 17 currencies, we find that a $1 billion demand shock to one currency moves other exchange rates by up to 9 basis points, with substantial heterogeneity across currency pairs. Our key insight is that cross-currency propagation can be decomposed into factor-level repricing and currencies' exposures to common risks. We make this decomposition empirically tractable by identifying three traded risk factors that account for 90% of the non-diversifiable risk banks bear when absorbing customer demand imbalances and that plausibly exhibit no cross-factor price effects. We estimate each factor's price sensitivity using sovereign bond auction announcements as instruments for non-informational shocks to factor demand and find that the FX market is highly elastic. Consistent with the model's predictions, out-of-sample FX interventions show that shocks originating in one currency transmit broadly across FX markets through shared risk exposures.